Let’s Do Something Constructive: A WeThePeople Proposal

A lot of people are disappointed by the 2016 election. But if there’s any silver lining to it, it’s that a lot of young people are becoming politically aware and more socially conscious.

While I was feeling disappointed about the quality of discussion and nasty rhetoric getting thrown around, it occurred to me: if we the American people don’t engage from the ground up in more constructive and forward-thinking dialog, then how will things change?

They won’t.

As we get ready for a new President, I was reflecting onPresident Obama’s legacy. Perhaps one of the greatest things that’s not talked about enough from President Obama’s legacy is the digital modernization of much of the United States federal government.

Many improvements are in the background, not eye-catching, merely helpful and better over time. And not everything new has fully caught on yet, but in particular, I think We the People — the official White House petition system — is a marvelous idea to encourage dialog and debate.

As I mused over the hours I’ve poured into watching the spectacle that’s become this year’s election, I thought instead — what if some of us, who care about the country and the issues, instead poured our time into thinking through and engaging with policy and refinements?

This is my attempt to do so.

Proposing A Paid-Off Primary Residence Tax Credit & Owned Home 401k Contributions

I’ve created a petition on “We the People” for a small change to tax policy that I think could have large positive implications for the country —

(1) a $5000 per year tax credit for people who completely own their primary residence (having paid off their mortgage in full, or saved and bought in cash), and,

(2) allowing homeowners to make to make tax-deferred 401k contributions to paying their mortgage off.

I believe this would benefit the middle class, decrease individual American indebtedness, decrease the risk of 2008-type systemic shocks, create a more viable asset class for savings and retirement, increase savings rates, give a tax advantage to individual homeowners over commercial landlords, and give a tax advantage to individual homeowners over non-resident foreign investors (the latter two both increasing asset prices which make owning a home less affordable).

Furthermore, this tax credit, if it was a fixed amount (say, $5000), would be progressive instead of regressive, and would make the largest difference to lower middle-class homeowners and people entering into their golden years while spending their last few years in the workforce.

The Current Problem: The Tax Code Incentives Buying a Bigger Home, and Investing in Tax-Deferred Stocks Instead of Post-Tax Mortgage Payments

In the first attempts to pass an income tax in the United States, all interest — not just home mortgage interest — was deductible. The income tax stuck after a Constitutional amendment in 1913, at which time all interest of any type was deductible.

Later, since 1986, interest on consumer debt was no longer allowed to be deducted… but a home-owner’s mortgage was still allowed as a deduction.

On a parallel track, almost every Presidential administration since Franklin Roosevelt’s in the 1930’s has worked to make home ownership more affordable. Agencies like the Federal National Mortgage Association and provisions like the GI Bill made credit available for buying homes.

There was always still an incentive to paying one’s mortgage off, though — you had to pay interest on the mortgage, which was often a large amount.

Today, though, we’re in a strange financial climate. A 30-year fixed-rate mortgage can be had for under 4% interest.

The stock market historically returns around 7% interest.

Thus, it makes mathematical sense for someone investing to carry a mortgage while investing in the stock market — netting them an extra 3%.

But, wait, it’s worse than that.

In 1978, the 401(k) provisions of the tax code were rolled out.

This meant you could defer money you saved for retirement — but it could only be invested in certain things, and your primary residence isn’t one of them.

That means that, in addition to the fact that stocks historically yield more than the cost of carrying a mortgage, an investment into one’s 401k into stocks is deductible right off your taxes.

Thus, someone in the 25% tax bracket could choose to invest $10,000 tax-deferred into the stock market in their 401k, or could pay tax on their income first, and then pay off $7,500 on their mortgage.

Furthermore, carrying the interest on the mortgage is additionally deductible!

The incentives means it makes a lot of sense for math-savvy homeowners to carry a mortgage while continuing to save the tax-advantaged money into one’s 401(k) plan, which most often goes into the stock market.

Well, what’s wrong with carrying a mortgage and investing in stocks?

Risk.

During a major recession like 2008, often a trio of problems hits:

(1) people get laid off and lose their income,

(2) home prices fall, and,

(3) stock market prices fall.

If a person is living in a home with the mortgage paid off, they have no housing cost if they become unemployed; they’re less vulnerable to shocks.

Likewise, the mix of a bubble in the stock market and debt leverage in mortgages creates… well, it creates a lot of potential problems.

The current climate of tax-advantaged stocks and tax-advantaged mortgage debt is probably leading to artificially high amounts of debt being carried, which means the whole American economy is more leveraged than it needs to be.

A substantial tax credit for a fully paid-off primary residence would help solve this, be progressive, reduce American indebtedness, and make Americans and the American economy more robust against recessions.

For instance, a $100,000 property which is fully paid off would result in a 5% higher yield when considering the tax credit. A $50,000 property would result in a 10% higher yield when considering the tax credit.

This gives consumers an alternative strategy to the current one of leveraging up on tax-advantaged debt to invest in tax-advantaged stocks.

If a young family could afford a house that costs $100,000 but instead chooses to buy a smaller home that they could pay off and receive the tax credit for, that makes them more robust, less susceptible to wage loss, and additionally, reduces somewhat the amount of pollution and waste in the American economy.

One might counter that this could discourage growth through larger home purchases — but as we saw in 2008, the growth from people buying larger homes than they can safely afford is somewhat illusory and comes with a potential vicious reckoning in a large recession. Quantum easing and debt monetization let us get out of that mess, but it’s an open question as to how many times those particular techniques can work effectively.

Furthermore, a paid-off mortgage seems like a very psychologically good thing.

Knowing that you own your home, and the bank has no say over you, must be a huge psychological advantage — it means people less tied to employers they dislike, more willing and able to start businesses, and more freedom and less insecurity in general.

It’s also very easy to understand — I’ve been studying the stock markets and indexing as a personal hobby for over 10 years now, and I feel like I only barely understand a little bit of the stock market.

But “I own my home and we don’t owe the bank anything” is very easy to understand. I believe that more people will choose to invest in their own home, debt-free, and it’s a very easy and low-risk case to make to one’s partner or spouse.

The potential disadvantage of less money going into explicitly designated retirement accounts could be met by allowing people to designate somewhere between $100,000 up to $1,000,000 of primary residence equity as a tax-deferred 401k contribution. It would be subject to all the normal rules — if the home is sold before retirement age, the proceeds must go into another primary residence, or back into the 401k, or a penalty paid.

This would put paying off one’s mortgage at parity with tax-deferred 401k stock investments, again, encouraging people to save and invest more, reduce their debt and monthly payments, and thus lowering risk of systemic shocks and exposure to needing to “buy high and sell low” in the stock market during a panic.

Call it a Domestic Marshall Plan, if you like.

I have no personal relation to that great general that advocated for reinvesting in the rebuilding of Europe after World War II, but as you can imagine, anyone I do planning with names whatever the outcome a “Marshall Plan” — well, here’s a Domestic Marshall Plan that might encourage reducing debt, making American homeowners more robust, and giving them more flexibility with a great asset class that can compare to the more-volatile stock market which is currently privileged as opposed to paying one’s mortgage off.

I don’t have any conflicts of interest here, wrote this proposal by myself for a policy just based on my studies of the financial markets and tax code, am speaking only for myself privately and not for any organization I’m affiliated with, and don’t stand to personally benefit except insofar as a stronger and more robust America is good for all Americans.

I know we’re all a little disappointed with the state of political discourse in this country — across all of the political spectrum — but I believe this policy would help a lot of people, make the economy stronger, and should be amenable to both Democrats and Republicans.

In order to get an official response from the White House, a petition must receive 100,000 signatures — I’m sure you’re incredibly busy, but if you think this has merit, would you kindly take the 3–5 minutes to ask the President to consider the proposal?

All you have to do is click on this link to the official White House site, type in your name and email, and then click a confirmation link that’s sent to you.

Asking for consideration of this petition isn’t the same as putting it into action — but it does mean the very smart people who work on the financial and tax policies of the country will take a look at it, consider it, and reply.

If you have a minute to vote for this petition, that would be wonderful —

https://petitions.whitehouse.gov//petition/create-paid-primary-residence-tax-credit-allow-paying-ones-mortgage-be-tax-deferred-401k-contribution

Thank you, regards,

Sebastian Marshall

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Sources:

http://www.nytimes.com/2006/03/05/magazine/who-needs-the-mortgageinterest-deduction.html?_r=0

https://www.law.cornell.edu/uscode/text/26/401

https://en.wikipedia.org/wiki/Taxation_history_of_the_United_States#Development_of_the_modern_income_tax

http://taxfoundation.org/article/2016-tax-brackets

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

http://www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/

https://en.wikipedia.org/wiki/401(k)

http://www.bankrate.com/finance/mortgages/current-interest-rates.aspx

https://en.wikipedia.org/wiki/Fannie_Mae